be correspondingly

Republic of the Philippines

decreased in the event
SUPREME COURT
that the applicable
Baguio City
maximum interest rate
FIRST DIVISION is reduced by law or by
the Monetary Board. In
either case, the
G.R. No. 113412 April 17, 1996 adjustment in the
Spouses PONCIANO ALMEDA and EUFEMIA P. interest rate agreed
ALMEDA, petitioner, upon shall take effect
vs. on the effectivity date
THE COURT OF APPEALS and PHILIPPINE of the increase or
NATIONAL BANK, respondents. decrease of the
maximum interest rate.
1

KAPUNAN, J.:p Between 1981 and 1984, petitioners made several

On various dates in 1981, the Philippine National partial payments on the loan totaling.
Bank granted to herein petitioners, the spouses P7,735,004.66, 2 a substantial portion of which was
Ponciano L. Almeda and Eufemia P. Almeda several applied to accrued interest. 3 On March 31, 1984,
loan/credit accommodations totaling P18.0 Million respondent bank, over petitioners' protestations,
pesos payable in a period of six years at an interest raised the interest rate to 28%, allegedly pursuant
rate of 21% per annum. To secure the loan, the to Section III-c (1) of its credit agreement. Said
spouses Almeda executed a Real Estate Mortgage interest rate thereupon increased from an initial
Contract covering a 3,500 square meter parcel of 21% to a high of 68% between March of 1984 to
land, together with the building erected thereon September, 1986. 4
(the Marvin Plaza) located at Pasong Tamo, Makati, Petitioner protested the increase in interest rates, to
Metro Manila. A credit agreement embodying the no avail. Before the loan was to mature in March,
terms and conditions of the loan was executed 1988, the spouses filed on February 6, 1988 a
between the parties. Pertinent portions of the said petition for declaratory relief with prayer for a writ
agreement are quoted below: of preliminary injunction and temporary restraining
SPECIAL CONDITIONS order with the Regional Trial Court of Makati,
docketed as Civil Case No. 18872. In said petition,
xxx xxx xxx
which was raffled to Branch 134 presided by Judge
The loan shall be subject to interest at Ignacio Capulong, the spouses sought clarification
the rate of twenty one per cent (21%) as to whether or not the PNB could unilaterally raise
per annum, payable semi-annually in interest rates on the loan, pursuant to the credit
arrears, the first interest payment to agreement's escalation clause, and in relation to
become due and payable six (6) Central Bank Circular No. 905. As a preliminary
months from date of initial release of measure, the lower court, on March 3, 1988, issued
the loan. The loan shall likewise be a writ of preliminary injunction enjoining the
subject to the appropriate service Philippine National Bank from enforcing an interest
charge and a penalty charge of three rate above the 21% stipulated in the credit
per cent (30%) per annum to be agreement. By this time the spouses were already in
imposed on any amount remaining default of their loan obligations.
unpaid or not rendered when due.
Invoking the Law on Mandatory Foreclosure (Act
xxx xxx xxx 3135, as amended and P.D. 385), the PNB countered
III. OTHER CONDITIONS by ordering the extrajudicial foreclosure of
petitioner's mortgaged properties and scheduled an
(c) Interest and Charges auction sale for March 14, 1989. Upon motion by
(1) The Bank reserves petitioners, however, the lower court, on April 5,
the right to increase the 1989, granted a supplemental writ of preliminary
interest rate within the injunction, staying the public auction of the
limits allowed by law at mortgaged property.
any time depending on On January 15, 1990, upon the posting of a
whatever policy it may counterbond by the PNB, the trial court dissolved
adopt in the future; the supplemental writ of preliminary injunction.
provided, that the Petitioners filed a motion for reconsideration. In the
interest rate on interim, respondent bank once more set a new date
this/these for the foreclosure sale of Marvin Plaza which was
accommodations shall March 12, 1990. Prior to the scheduled date,
however, petitioners tendered to respondent bank
the amount of P40,142,518.00, consisting of the
principal (P18,000,000.00) and accrued interest
calculated at the originally stipulated rate of 21%.
The PNB refused to accept the payment. 5
As a result of PNB's refusal of the tender of
payment, petitioners, on March 8, 1990, formally
consigned the amount of P40,142,518.00 with the
Regional Trial Court in Civil Case No. 90-663. They
prayed therein for a writ of preliminary injunction
with a temporary restraining order. The case was
raffled to Branch 147, presided by Judge Teofilo
Guadiz. On March 15, 1990, respondent bank sought In its comment dated April 19, 1994, respondent
the dismissal of the case.
On March 30, 1990 Judge Guadiz in Civil Case No.
90-663 issued an order granting the writ of
preliminary injunction enjoining the foreclosure sale the parties. Respondent bank further contends that
of "Marvin Plaza" scheduled on March 12, 1990. On
April 17, 1990 respondent bank filed a motion for
reconsideration of the said order.
On August 16, 1991, Civil Case No. 90-663 we
transferred to Branch 66 presided by Judge Eriberto The instant petition is impressed with merit.
Rosario who issued an order consolidating said case
with Civil Case 18871 presided by Judge Ignacio
Capulong.
For Judge Ignacio's refusal to lift the writ of
preliminary injunction issued March 30, 1990,
respondent bank filed a petition for Certiorari,
Prohibition and Mandamus with respondent Court of contract which appears to be heavily weighed in
Appeals, assailing the following orders of the
Regional Trial Court:
1. Order dated March 30, 1990 of
Judge Guadiz granting the writ of
preliminary injunction restraining the likewise, invalid.
foreclosure sale of Mavin Plaza set on It is plainly obvious, therefore, from the undisputed
March 12, 1990;
2. Order of Judge Ignacio Capulong
dated January 10, 1992 denying
respondent bank's motion to lift the
writ of injunction issued by Judge
Guadiz as well as its motion to
dismiss Civil Case No. 90-663;
3. Order of Judge Capulong dated July
3, 1992 denying respondent bank's
subsequent motion to lift the writ of
preliminary injunction; and
4. Order of Judge Capulong dated
October 20, 1992 denying respondent
bank's motion for reconsideration.
On August 27, 1993, respondent court rendered its
decision setting aside the assailed orders and
upholding respondent bank's right to foreclose the
mortgaged property pursuant to Act 3135, as
amended and P.D. 385. Petitioners' Motion for
Reconsideration and Supplemental Motion for
Reconsideration, dated September 15, 1993 and
October 28, 1993, respectively, were denied by
respondent court in its resolution dated January 10,
1994.
Hence the instant petition.
This appeal by certiorari from the respondent court's
decision dated August 27, 1993 raises two principal
issues namely: 1) Whether or not respondent bank
was authorized to raise its interest rates from 21%
to as high as 68% under the credit agreement; and
2) Whether or not respondent bank is granted the
authority to foreclose the Marvin Plaza under the
mandatory foreclosure provisions of P.D. 385.
bank vigorously denied that the increases in the
interest rates were illegal, unilateral, excessive and
arbitrary, it argues that the escalated rates of
interest it imposed was based on the agreement of
it had a right to foreclose the mortgaged property
pursuant to P.D. 385, after petitioners were unable
to pay their loan obligations to the bank based on
the increased rates upon maturity in 1984.
The binding effect of any agreement between
parties to a contract is premised on two settled
principles: (1) that any obligation arising from
contract has the force of law between the parties;
and (2) that there must be mutuality between the
parties based on their essential equality. 6 Any
favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract
which is left solely to the will of one of the parties, is
facts of the case that respondent bank unilaterally
altered the terms of its contract with petitioners by
increasing the interest rates on the loan without the
prior assent of the latter. In fact, the manner of
agreement is itself explicitly stipulated by the Civil
Code when it provides, in Article 1956 that "No
interest shall be due unless it has been expressly
stipulated in writing." What has been "stipulated in
writing" from a perusal of interest rate provision of
the credit agreement signed between the parties is
that petitioners were bound merely to pay 21%
interest, subject to a possible escalation or de-
escalation, when 1) the circumstances warrant such
escalation or de-escalation; 2) within the limits
allowed by law; and 3) upon agreement.
Indeed, the interest rate which appears to have
been agreed upon by the parties to the contract in
this case was the 21% rate stipulated in the interest
provision. Any doubt about this is in fact readily
resolved by a careful reading of the credit
agreement because the same plainly uses the
phrase "interest rate agreed upon," in reference to
the original 21% interest rate. The interest provision
states:
(c) interest and Charges
(1) The Bank reserves the right to
increase the interest rate within the
limits allowed by law at any time
depending on whatever policy it may
adopt in the future; provided, that the
interest rate on this/these
accommodations shall be
correspondingly decreased in the
event that the applicable maximum
interest rate is reduced by law or by
the Monetary Board. In either case,
the adjustment in the interest rate
agreed upon shall take effect on the
effectivity date of the increase or
decrease of the maximum interest
rate.
In Philippine National Bank v. Court of Appeals, 7 this
Court disauthorized respondent bank from
unilaterally raising the interest rate in the
borrower's loan from 18% to 32%, 41% and 48%
partly because the aforestated increases violated
the principle of mutuality of contracts expressed in
Article 1308 of the Civil Code. The Court held:
CB Circular No. 905,
Series of 1982 (Exh. 11)
removed the Usury Law
ceiling on interest rates
— violated an express provision of the
. . . increases in interest
rates are not subject to
any ceiling prescribed
by the Usury Law.
but it did not authorize the PNB, or
any bank for that matter, to
unilaterally and successively increase
the agreed interest rates from 18% to
48% within a span of four (4) months,
in violation of P.D. 116 which limits
such changes to once every twelve
months.
Besides violating P.D. 116, the
unilateral action of the PNB in
increasing the interest rate on the
private respondent's loan, violated
the mutuality of contracts ordained in
Article 1308 of the Civil Code:
Art. 308. The contract must bind both
contracting parties; its validity or
compliance cannot be left to the will
of one of them.
In order that obligations arising from
contracts may have the force of law
between the parties, there must be
mutuality between the parties based
on their essential equality. A contract
containing a condition which makes
its fulfillment dependent exclusively
upon the uncontrolled will of one of
the contracting parties, is void (Garcia
vs. Rita Legarda, Inc., 21 SCRA 555).
Hence, even assuming that the P1.8
million loan agreement between the
PNB and the private respondent gave
the PNB a license (although in fact
there was none) to increase the
interest rate at will during the term of
the loan, that license would have
been null and void for being violative
of the principle of mutuality essential
in contracts. It would have invested
the loan agreement with the
character of a contract of adhesion,
where the parties do not bargain on
equal footing, the weaker party's (the
debtor) participation being reduced to
the alternative "to take it or lease it"
(Qua vs. Law Union & Rock Insurance
Co., 95 Phil. 85). Such a contract is a
veritable trap for the weaker party
whom the courts of justice must
protect against abuse and imposition.
PNB's successive increases of the
interest rate on the private
respondent's loan, over the latter's
protest, were arbitrary as they
Credit Agreement (Exh. 1) Section
9.01 that its terms "may be amended
only by an instrument in writing
signed by the party to be bound as
burdened by such amendment." The
increases imposed by PNB also
contravene Art. 1956 of the Civil Code
which provides that "no interest shall
be due unless it has been expressly
stipulated in writing."
The debtor herein never agreed in
writing to pay the interest increases
fixed by the PNB beyond 24% per
annum, hence, he is not bound to pay
a higher rate than that.
That an increase in the interest rate
from 18% to 48% within a period of
four (4) months is excessive, as found
by the Court of Appeals, is
indisputable.
Clearly, the galloping increases in interest rate
imposed by respondent bank on petitioners' loan,
over the latter's vehement protests, were arbitrary.
Moreover, respondent bank's reliance on C.B.
Circular No. 905, Series of 1982 did not authorize
the bank, or any lending institution for that matter,
to progressively increase interest rates on
borrowings to an extent which would have made it
virtually impossible for debtors to comply with their
own obligations. True, escalation clauses in credit
agreements are perfectly valid and do not
contravene public policy. Such clauses, however, (as
are stipulations in other contracts) are nonetheless
still subject to laws and provisions governing
agreements between parties, which agreements —
while they may be the law between the contracting
parties — implicitly incorporate provisions of
existing law. Consequently, while the Usury Law
ceiling on interest rates was lifted by C.B. Circular
905, nothing in the said circular could possibly be
read as granting respondent bank carte blanche
authority to raise interest rates to levels which
would either enslave its borrowers or lead to a
hemorrhaging of their assets. Borrowing represents
a transfusion of capital from lending institutions to
industries and businesses in order to stimulate
growth. This would not, obviously, be the effect of
PNB's unilateral and lopsided policy regarding the
interest rates of petitioners' borrowings in the
instant case.
Apart from violating the principle of mutuality of
contracts, there is authority for disallowing the
interest rates imposed by respondent bank, for the
credit agreement specifically requires that the
increase be "within the limits allowed by law". In the
case of PNB v. Court of Appeals, cited above, this
Court clearly emphasized that C.B. Circular No. 905
could not be properly invoked to justify the
escalation clauses of such contracts, not being a
grant of specific authority.
Furthermore, the escalation clause of the credit
agreement requires that the same be made "within
the limits allowed by law," obviously referring
specifically to legislative enactments not
administrative circulars. Note that the phrase "limits
imposed by law," refers only to the escalation
clause. However, the same agreement allows
reduction on the basis of law or the Monetary Board.
Had the parties intended the word "law" to refer to
both legislative enactments and administrative
circulars and issuances, the agreement would not
have gone as far as making a distinction between
"law or the Monetary Board Circulars" in referring to
mutually agreed upon reductions in interest rates.
This distinction was the subject of the Court's
disquisition in the case of Banco Filipino Savings
and Mortgage Bank v. Navarro 8 where the Court
held that:
What should be resolved is whether
BANCO FILIPINO can increase the
interest rate on the LOAN from 12%
to 17% per annum under the
Escalation Clause. It is our considered
opinion that it may not.
The Escalation Clause reads as
follows:
I/We hereby authorize Banco Filipino
to correspondingly increase.
the interest rate stipulated in this
contract without advance notice to
me/us in the event.
a law
increasing
the lawful rates of interest that may
be charged
on this particular
kind of loan. (Paragraphing and
emphasis supplied)
It is clear from the stipulation
between the parties that the interest
rate may be increased "in the event a
law should be enacted increasing the
lawful rate of interest that may be
charged on this particular kind of
loan." The Escalation Clause was
dependent on an increase of rate
made by "law" alone.
CIRCULAR No. 494, although it has
the effect of law, is not a law.
"Although a circular duly issued is not
strictly a statute or a law, it has,
however, the force and effect of law."
(Emphasis supplied). "An
administrative regulation adopted
pursuant to law has the force and
effect of law." "That administrative
rules and regulations have the force
of law can no longer be questioned."
The distinction between a law and an
administrative regulation is
recognized in the Monetary Board
guidelines quoted in the latter to the
BORROWER of Ms. Paderes of
September 24, 1976 (supra).
According to the guidelines, for a
loan's interest to be subject to the
increases provided in CIRCULAR No.
494, there must be an Escalation
Clause allowing the increase "in the
event that any law or Central Bank
regulation is promulgated increasing
the maximum rate for loans." The
guidelines thus presuppose that a
Central Bank regulation is not within
the term "any law."
The distinction is again recognized by
P.D. No. 1684, promulgated on March
17, 1980, adding section 7-a to the
Usury Law, providing that parties to
an agreement pertaining to a loan
could stipulate that the rate of
interest agreed upon may be
increased in the event that the
 applicable maximum rate of interest which was applied to interest alone. By the time the
is increased "by law or by the spouses tendered the amount of P40,142,518.00 in
Monetary Board." To quote: settlement of their obligations; respondent bank
was demanding P58,377,487.00 over and above
Sec. 7-a. Parties to an
those amounts already previously paid by the
agreement pertaining
to a loan or forbearance spouses.
of money, goods or Escalation clauses are not basically wrong or legally
credits may stipulate objectionable so long as they are not solely
that the rate of interest potestative but based on reasonable and valid
agreed upon may be grounds. 9 Here, as clearly demonstrated above, not
increased in the event only the increases of the interest rates on the basis
that the applicable of the escalation clause patently unreasonable and
maximum rate of unconscionable, but also there are no valid and
interest reasonable standards upon which the increases are
anchored.
is increased by law or
by the Monetary Board: We go now to respondent bank's claim that the
principal issue in the case at bench involves its right
Provided, That such
to foreclose petitioners' properties under P.D. 385.
stipulation shall be
We find respondent's pretense untenable.
valid only if there is
also a stipulation in the Presidential Decree No. 385 was issued principally
agreement that the to guarantee that government financial institutions
rate of interest agreed would not be denied substantial cash inflows
upon shall be reduced necessary to finance the government's development
in the event that the projects all over the country by large borrowers who
applicable maximum resort to litigation to prevent or delay the
rate of interest is government's collection of their debts or loans. 10 In
reduced by law or by facilitating collection of debts through its automatic
the Monetary Board; foreclosure provisions, the government is however,
not exempted from observing basic principles of
Provided, further, That
law, and ordinary fairness and decency under the
the adjustment in the
due process clause of the Constitution. 11
rate of interest agreed
upon shall take effect In the first place, because of the dispute regarding
on or after the the interest rate increases, an issue which was
effectivity of the never settled on merit in the courts below, the exact
increase or decrease in amount of petitioner's obligations could not be
the maximum rate of determined. Thus, the foreclosure provisions of P.D.
interest.' (Paragraphing 385 could be validly invoked by respondent only
and emphasis after settlement of the question involving the
supplied). interest rate on the loan, and only after the spouses
refused to meet their obligations following such
It is now clear that from March 17,
determination. In Filipinas Marble Corporation v.
1980, escalation clauses to be valid
Intermediate Appellate Court, 12 involving P.D. 385's
should specifically provide: (1) that
provisions on mandatory foreclosure, we held that:
there can be an increase in interest if
increased by law or by the Monetary We cannot, at this point, conclude
Board; and (2) in order for such that respondent DBP together with
stipulation to be valid, it must include the Bancom people actually
a provision for reduction of the misappropriated and misspent the $5
stipulated interest "in the event that million loan in whole or in part
the applicable maximum rate of although the trial court found that
interest is reduced by law or by the there is "persuasive" evidence that
Monetary Board." such acts were committed by the
respondent. This matter should
Petitioners never agreed in writing to pay the
rightfully be litigated below in the
increased interest rates demanded by respondent
main action. Pending the outcome of
bank in contravention to the tenor of their credit
such litigation, P.D. 385 cannot
agreement. That an increase in interest rates from
automatically be applied for if it is
18% to as much as 68% is excessive and
really proven that respondent DBP is
unconscionable is indisputable. Between 1981 and
responsible for the misappropriation
1984, petitioners had paid an amount equivalent to
of the loan, even if only in part, then
virtually half of the entire principal (P7,735,004.66)
 the foreclosure of the petitioner's
properties under the provisions of P.D.
385 to satisfy the whole amount of
the loan would be a gross mistake. It
would unduly prejudice the petitioner,
its employees and their families.
Only after trial on the merits of the
main case can the true amount of the
loan which was applied wisely or not,
for the benefit of the petitioner be
determined. Consequently, the extent
of the loan where there was no failure
of consideration and which may be
properly satisfied by foreclosure
proceedings under P.D. 385 will have
to await the presentation of evidence
in a trial on the merits.
In Republic Planters Bank v. Court of Appeals 13 the
Court reiterating the dictum in Filipinas Marble
Corporation, held:
The enforcement of P.D. 385 will
sweep under the rug' this iceberg of a
scandal in the sugar industry during
the Marcos Martial Law years. This we
can not allow to happen. For the
benefit of future generations, all the
dirty linen in the
PHILSUCUCOM/NASUTRA/RPB closets
have to be exposed in public so that
the same may NEVER be repeated.
It is of paramount national interest,
that we allow the trial court to
proceed with dispatch to allow the
parties below to present their
evidence.
Furthermore, petitioners made a valid consignation
of what they, in good faith and in compliance with
the letter of the Credit Agreement, honestly
believed to be the real amount of their remaining
obligations with the respondent bank. The latter
could not therefore claim that there was no honest-
to-goodness attempt on the part of the spouse to
settle their obligations. Respondent's rush to
inequitably invoke the foreclosure provisions of P.D.
385 through its legal machinations in the courts
below, in spite of the unsettled differences in
interpretation of the credit agreement was obviously
made in bad faith, to gain the upper hand over
petitioners.
In the face of the unequivocal interest rate
provisions in the credit agreement and in the law
requiring the parties to agree to changes in the
interest rate in writing, we hold that the unilateral
and progressive increases imposed by respondent
PNB were null and void. Their effect was to increase
the total obligation on an eighteen million peso loan
to an amount way over three times that which was
originally granted to the borrowers. That these
increases, occasioned by crafty manipulations in the
interest rates is unconscionable and neutralizes the
salutary policies of extending loans to spur business
cannot be disputed.
WHEREFORE, PREMISES CONSIDERED, the decision
of the Court of Appeals dated August 27, 1993, as
well as the resolution dated February 10, 1994 is
hereby REVERSED AND SET ASIDE. The case is
remanded to the Regional Trial Court of Makati for
further proceedings.
SO ORDERED.
Bellosillo and Hermosisima, Jr., JJ., concur.
Padilla and Vitug, JJ., took no part.
Footnotes
1 Rollo, pp. 48-55.
2 Id., at ,165.
3 Id.
4 Id.
5 The PNB claimed that as of March 12,
1990, the spouses balance was
P58,377,487.31, using the increased interest
rates for computing accrued interest.
6 Garcia v. Legarda, 21 SCRA 555 (1967).
7 196 SCRA 536, 543 (1991).
8 152 SCRA 346 (1987).
9 Vitug's Compedium of Civil Law and
Jurisprudence, Revised Edition, 1993, p. 533,
citing PNB v. IAC, 183 SCRA 133; PNB v.
Court of Appeals, 196, SCRA 536.
10 Sections 1 and 2 of P.D. 385 provide:
Sec. 1. It shall be mandatory for
government financial institutions,
after the lapse of sixty (60) days from
the issuance of this Decree, to
foreclose the collaterals and/or
securities for any loan, credit
accommodation, and/or guarantees
granted by them whenever the
arrearages on such account,
concluding accrued interest and other
obligations, including interest and
other charges, as appearing in the
book of accounts and/or related
records of the financial institution
concerned. This shall be without
prejudice to the exercise by the
government financial institution of
such rights and/or remedies available
to them under their respective
contracts with their debtors, including
the right to foreclose on loans,
credits, accommodations, and/or
guarantees on which the arrearages
are less than twenty percent (20%).
 Sec. 2. No restraining order,
temporary or permanent injunction
shall be issued by the court against
any government financial institution
in any action taken by such institution
in compliance with the mandatory
foreclosure provided in Section 1
hereof, whether such restraining
order, temporary or permanent
injunction is sought by the
borrower(s) or any third party or
parties, except after due hearing in
which it is established by the
borrower,
and admitted by the government
financial institution concerned that
twenty percent (20%) of the
outstanding arrearages has been paid
after the filing of foreclosure
proceedings.
11 Filipinas Marble Corporation v.
Intermediate Appellate Court, 142 SCRA 181
(1986).
12 Id.
13 213 SCRA 413 (1992).